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Wednesday, October 09, 2013

danger

Here are four charts which tell me that the US stock market is headed for trouble.

The top daily bar chart shows the Dow Industrials for the past two years. The Dow has been the weakest of the major averages. Today it dropped a little below its late August low while the S&P 500 and the advance-decline line (second and third charts) are still both above their late August lows. Your can see that the Dow has already dropped to the level of its rising 200 day moving average while the other two indicators are still well above their 200 day moving averages.

Of immediate concern here is that all three indicators are now trading below their 50 day moving averages. This is a late indication that the market's trend has turned downward. The market has been trading more or less sideways since its May 2013 top and normally once a downtrend starts within a trading range like this it doesn't end until the market drops to or a bit below some recent low. Both the S&P and the advance-decline line have further to go on the downside before they reach their August lows.

The longer run picture shows some definite weakness as well. The bottom chart shows the 20 day moving average of the daily count of 12 month new highs on the New York Stock exchange. You can see the pattern of lower tops which has developed since the May 2013 high. This is a definite, long run, bearish divergence. It suggests that any drop below the June low will probably signal the onset of a bear market.

Lindsay's 15 year period from bear market low to bull market high counted from the 1998 low in the Dow (the average Lindsay preferred to use ) expired on August 31, 2013. At the same time the 2 year basic advance from the October 2011 low has probably reached its end. This is another bearish factor which would underline the significance of a downside breakout from the current 5 month trading range.

Both of these Lindsay's methods allow time for another new high, however. Along these lines it is also worth noting the minor version of a potential three peaks formation in the Dow, S&P and advance-decline line which is visible in the charts above. I use the adjective "minor" because Lindsay insisted that his "major" 3pdh formations show the first and last peaks separated by 6-10 months instead of the 4 months in this "minor" formation. Nonethess, note that the Dow has broken below the August low and this action identifies the three peaks. Once the current drop is over the domed house would then carry the Dow to new bull market highs. Even then I would expect the ultimate top to occur early in 2014 to be within the parameters of the 15 year period and the basic advance from the October 2011 low.

1 comment:

Hi CarlThanks for the update of your thoughts. something i find interesting and im looking at the dow only here . the drop from may high to the june low and the drop from the sept high to the oct low are almost identical in terms of points . as far as the 3 peaks domed house pattern is concerned i still am following it from the 2010 low and realize that is outside the parameters at this juncture in terms of length of time .to me point 22 was the June lows . what i find interesting at this jointures in the pattern .there is a bullish labeling to consider .the drop from may to June being an ( a ) wave the rally into august a (b) wave ? and then the whips saws all a wave (c)? there is variables such as the rally from june into sept as wave ( b ) and wave (c) has now ended ? the high in may to the high in august was 51 trade days adding 51 trade days targets oct 15 as a low .the problem i see with the 3 peaks domed house is if the august high is point 23 and the aug low is point 24 the sept high is point 25 then point 26 should have had the downward slant this can be seen with in the indicators yet if price is the final basis then the dow failed to produce a valid pt 26 low . this also means the dow failed to produce a valid pt 24 low . summary : if the dow actually printed pt 21 in may and point 22 in in june , the bullish case implies point 23 still lies ahead of us . using closing daily numbersthe closed ticks above the august low and has now had 5 reversals since may how this fits in the smaller picture ( compared to the larger ) im not sure . yet the bias as this juncture to me is higher high's as long as the June lows hold . what im getting at and its abit of a stretch . point 21 in may and 5 reversals to label all of point 22 . from an Elliot wave perspective .the june lows matter . the move from june to august a wave 1 of sorts the drop in august a wave 2 of sorts the rally up to a new high in mid sept another wave 1 of sorts and this recent drop ( closing numbers mind you ) another wave 2 of sorts of the next higher degree . if this holds true it is EXTREMELY BULLISH 1 2 i ii . this places us in a wave iii of 3 which will take us up towards point 23 most likely into mid January 2014 .The bearish case is obvious , if the dow breaks the june lows and most likely breaks the recent lows ( the june lows matter though ) ill have to accept the bull market is over.thanks sorry for being long winded Joe

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About Me

I write three financial blogs. The first is Carl Futia.On this blog I post daily "guestimates" of the current trends and trend potential in important markets. Once a week I post an explanation of my views on one of these markets with illustrative charts.
My second blog, Carl Futia Real Time, is subscription based. It is a real time trading seminar in which members receive my real time analysis of the E-mini S&P futures and can watch me trade them. In this seminar I explain how I calculate support and resistance levels and how I recognize market "rejections" of support or resistance which then determine the current trend directions.
My third blog is called The Art of Contrarian Trading and is based on my book of the same title. On that blog I focus less on day-to-day market details and more on swings in investor sentiment, the "information cascades" which I talk about in my book.